Europe Acts Swiftly on Long-Delayed Greek Bailout

Friday

Apr 30, 2010 at 4:17 AM

European leaders raced to complete a financial rescue package for Greece, hoping to head off a chain reaction against other heavily indebted European nations.

BERLIN — European leaders raced Thursday to complete their part of a long-delayed financial rescue package for Greece, hoping to head off a chain reaction against other heavily indebted European nations that could turn into a financial meltdown across the continent.

After balking for months at bailing out the Greek economy, leaders in Germany attacked the crisis with a newfound urgency. One day after Chancellor Angela Merkel declared her support for swift action, opposition parties in Berlin signaled a willingness to move quickly on legislation to send billions in loans to Athens before it needs to repay bondholders more than $10 billion on May 19.

Markets reacted positively Thursday to the news of a plan that would provide up to $160 billion from the International Monetary Fund and the other countries that use the euro currency. The euro strengthened against the dollar on the news, after hitting a one-year low the day before, and the cost of insuring against the default of European bonds fell.

European leaders — many of whom resisted the involvement of the I.M.F. and who have now been prodded to action by its director, Dominique Strauss-Kahn — have struggled for months for an effective response to the Greek problem. In the process, critics say, the costs of a bailout have mounted drastically.

And there was fresh skepticism on Thursday whether the latest proposal would calm the markets for more than a day, in a crisis where official promises of action have been followed by new delays and a steady stream of bad news, like the downgrades this week of the debt of Greece, Portugal and Spain.

Financial experts expressed fears on Thursday that Mrs. Merkel might have waited so long that the contagion had spread beyond even Germany’s ability to contain it. “These downgrades this week show that the market has taken over,” said Alfred Steinherr, research professor at the DIW research institute in Berlin and a former chief economist at the European Investment Bank. “Now, it is very difficult for policy makers to take it back into their own hands.”

There is a risk now that “even Germany will become financially overburdened,” Dr. Steinherr said, if it is forced to pay tens or hundreds of billions to Greece and possibly other euro-area countries like Portugal and Spain. “And that would then become really a huge crisis.”

European leaders tried to claim the initiative and show that they were working together to calm market fears over Greece’s tide of debt and the long-term viability of the euro currency. Traveling in Beijing on Thursday, President Nicolas Sarkozy of France told reporters that he was in constant contact with Mrs. Merkel and that Germany and France were “in perfect agreement” on how to deal with the crisis, a spokesman for the president in Paris confirmed.

Negotiators in Athens pushed to wrap up an agreement for significant cuts in Greek public spending to clear the way for the government to get financing and reassure investors worldwide that European debt was safe.

The Greek prime minister, George Papandreou, met with labor leaders on Thursday to persuade them to accept austerity measures that the government hopes will help clear the way to securing the bailout package.

After the meeting, Ilias Iliopoulos, the general secretary of Adedy, the largest public employees union, said in an interview that union officials had been informed that Greece had been asked to raise its value-added tax to 25 percent and to accept a three-year pay freeze.

He said Mr. Papandreou also intended to introduce new rules to let companies reduce their work forces by 4 percent a month instead of the current 2 percent, and to increase taxes on fuel, tobacco and alcohol.

In Greece, where taking to the streets is a national pastime, some observers have feared a backlash. But analysts said that Greek public opinion, opposition parties and even the unions realized the gravity of the situation and were unlikely to succeed in blocking measures that were necessary to save the country from economic collapse.

“The reaction of the unions so far has been mild by Greek standards,” said Nikos Magginas, senior economist at the National Bank of Greece, the country’s largest commercial bank. “Public opinion in Greece is in shock and realizes that Greeks have no other choice but to do what is necessary to prevent economic collapse. A social consensus exists that this is necessary.”

European leaders also sought to head off a harsh public reaction to the bailout plan. Olli Rehn, the European Union commissioner for monetary affairs, said at a news conference in Brussels on Thursday that the loan package would be a benefit to all member states sharing the euro currency — not just a sop for spendthrift Greeks. “This is absolutely crucial for our economic recovery,” he said.

Prominent German officials, including President Horst Köhler and Axel Weber, the president of the German Bundesbank, made public statements in support of Mrs. Merkel’s plan, with a similar emphasis on the benefits to Germany from such an agreement.

“Germany should, in its own interest, provide its contribution to the stabilization,” Mr. Köhler said in a televised speech in Munich.

“The German taxpayer profits from a stable euro, and that holds for protecting it,” Mr. Weber told Germany’s highest-circulation newspaper, the tabloid Bild, which has hammered relentlessly on the theme of Greek greed and wastefulness since the crisis began this year. The interview with Mr. Weber ran on the second page of the paper, while a giant headline on the front page declared, “Greeks want even more billions from us!”

“If Greece is allowed to fail, the damage to the German budget and German taxpayers will with certainty be greater than if we rescue it,” said Roland Koch, state premier in Hessen and a leading member of Mrs. Merkel’s Christian Democrats, in an interview on Thursday with the daily newspaper Berliner Zeitung. “The faster a decision is made, the less harm will arise,” Mr. Koch said.

It was unclear whether the pleas were having much impact. A poll of a thousand adults by the research group Emnid on behalf of the television news channel N24 found that 76 percent of those surveyed said they did not believe Greece would repay its debts, compared with just 19 percent who thought it could.

“You don’t help an alcoholic by putting a bottle of schnapps in front of him,” said Frank Schäffler, a member of the Finance Committee in the German Parliament for the pro-business Free Democrats, the junior member of Mrs. Merkel’s governing coalition. But even Mr. Schäffler said the proposal was likely to pass Parliament quickly, now that opposition parties like the Social Democrats and the Greens were prepared to act.

“The population in Germany is with a very, very great majority against, and the Parliament will probably approve it with a very great majority,” Mr. Schäffler said.

Germany will raise its share of the money through KfW, the state development bank, according to lawmakers and a letter attached to a draft version of the bill sent out this week. The legislation is one page long and includes a one-page explanatory statement. In the version of the bill circulated to members of the government on Tuesday, the sum of $11 billion is listed for this year. The figure for the following two years was yet to be filled in.

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